The Dirty Little Secret of Economic Impacts of Federal Rules

“We, the U.S. Fish and Wildlife Service (FWS) and the National Marine Fisheries Service (NMFS) (collectively referred to as the ‘‘Services’’ or ‘‘we’’), propose to revise our regulations pertaining to impact analyses conducted for designations of critical habitat under the Endangered Species Act of 1973, as amended (the Act). These changes are being proposed as directed by the President’s February 28, 2012, memorandum, which directed us to take prompt steps to revise our regulations to provide that the economic analysis be completed and made available for public comment at the time of publication of a proposed rule to designate critical habitat.” —Preamble to FWS–R9–ES–2011–0073, Proposed Federal Rulemaking published August 24, 2012.

If this is all you read about this proposed rules change, you’d think, “OK, no big deal this makes sense. We want the economic impact analysis of Federal rules to be complete—otherwise why bother. We also want to see that complete analysis before the public comment period so we can actually comment on the estimated cost and impact of proposed rules.”

But according to a newly released Stoel Rives analysis of the impact and implications of the proposed critical habitat rules change, the dirty little secret is you would be mistaken.

Critical habitat protection has been one of the most controversial and intrusive provisions of the Endangered Species Act (ESA). The goal of the provision was to avoid doing more harm to endangered species thus giving them an opportunity to sustain themselves. The ESA says Federal agencies may not take actions that destroy or adversely affect critical habitat. There is nothing wrong with this goal, but the way it has been applied has resulted in situations where the designation amounts to a virtual taking of private property for a public purpose.

This critical habitat designation provision also creates opportunity for abuse of discretion if Federal agencies or environmental interveners use it to coerce outcomes that undermine the economics of proposed projects. We often refer to this as NIMBY or other pejoratives, but they are symptoms of a Federal environmental regulatory process that is out of balance. The review of the real implications of this proposed rules change is a good case study in the creeping process of environmental GOTCHA played out by rulemaking.

To balance the coercive potential of critical habitat designation, the Stoel Rives analysis reminds us that the ESA requires Federal agencies to “consider potential economic, national security, and other relevant impacts”. This includes economic impacts to private landowners and developers. And in cases where this balancing of interests finds that there are more economic, national security or other benefits from doing so the Federal Agencies “may exclude an area from critical habitat” if those benefits outweigh the benefits of including it in the designation.

See why this is so contentious?

The case law is littered with conflicting decisions in these matters. And that too creates opportunities for mischief. Here we can even sympathize with Federal bureaucrats trying to write rules that will apply to all when a decision in one Federal court may be at odds with a decision interpreting the same provision differently in another. That is what apparently provoked this proposed rulemaking.

Dueling Appeal Court Rulings

The Ninth Circuit Court of Appeals, the most overturned court in the nation, adopted a “baseline approach” to critical habitat designation which allowed the Federal agencies to consider only ‘incremental impacts’ in their economic impact analysis of critical habitat designation. The practical effect of the ruling in the Western states where it was applicable was to enable the agencies to calculate the cost of a rule using minor additional administrative costs rather than the total regulatory burden. The result , of course, was much more critical habitat was found to pass the cost benefit test and many more landowners were suing to stop it in Federal court.

In the Tenth Circuit Court of Appeals the same question was litigated and appealed with the opposite result. The Tenth circuit said the baseline incremental approach used in the Ninth Circuit was unlawful precisely because it ignored the full cost of regulatory burdens in measuring the overall cost and benefits of the critical habitat designation as required by the ESA.

So what?

So the proposed rulemaking seeks to adopt the Ninth Circuit opinion allowing this incremental baseline approach and reject the Tenth circuit opinion. If this proposed rule is adopted it surely will be litigated to the DC circuit where Federal rules are appealed and perhaps then onto the US Supreme Court.

You may comment on the proposed rule until October 23, 2012 as follows: